Independent capital gains rules are applicable for each asset class. However, there are numerous sections under which if you reinvest your long-term capital gains you can save on tax
Capital gain is the profit you make when you sell an asset. This means that when you sell assets such as stocks, mutual funds, real estate, gold or bonds at a price higher than the purchase price, the profit you make is your capital gain. Capital gain should not be confused with interest or dividend gains from your asset.
Capital gains, dividends, and interest are all treated differently from the point of view of taxation. Your investments, savings and assets may collect interest or periodically generate dividends. But capital gain represents income that you get only when you sell your asset at a price higher than its purchase price.
What assets accrue capital gains?
Assets like land and buildings, or property in any other form, as well as trademarks in your name, machinery you own, jewellery, and stocks are regarded as capital assets that offer capital gains.
However, the following assets are not counted as capital assets and the profit made on selling them does not count as capital gains: any stock or raw material used for official or commercial purposes, personal goods like clothes and furniture, and agricultural land in rural India.
Here, any area that does not fall under a municipality or jurisdiction is referred to as rural India.
Classification of capital assets
Assets are classified as per their holding period—short-term capital assets and long-term capital assets. Let’s look at short-term capital assets first. Bonds, debt mutual funds, and gold (or equivalent of gold assets such as gold funds) that you hold for 36 months or less are regarded as short-term capital asset. There are two exceptions: For immovable assets such as land, buildings and houses, the holding period is 24 months or less, and for equity investments (shares, equity mutual funds), the holding period is 12 months or less. If the asset is held for longer than the above-mentioned periods, they become long-term capital assets. If you acquire any asset as a gift or inheritance, irrespective of the type of asset, the period for which the previous owner held it is also counted along with the time you held it for when you sell it.
As per the Income Tax Act, capital gains are taxable. However, independent taxation rules are applicable for each asset class. Broadly, in case of long-term capital assets you have to pay 20.6% tax on your net profit, and at 10.3% on gains above Rs 1 lakh if the asset is equity. With short-term capital assets, your profit is added to your total taxable income and taxed as per your slab, except for short-term capital gains on equity, which are taxed at 15.45%.
How to save taxes on capital gains
There is no way in which you can avoid the securities transaction tax on your short-term capital gains. However, there are numerous slabs and sections under which you can save on tax if you reinvest your long-term capital gains.
Section 54: Under this section, you can avoid tax on capital gains from the sale of a house property if you reinvest the money to buy another property. You can claim tax exemptions under this section if you buy the new property one year before the sale or two years after the sale. In case it is under construction, the new property should be ready within three years of the old property’s sale.
Section 54EC: You can claim tax exemption by using the amount you gain from selling an asset to buy bonds issued by NHAI and REC.
Section 54F: You can claim total tax exemption by using the money you gain from selling any asset (except a house property) to buy a house property, which needs to be bought one year before the sale or two years after thse sale. For under-construction properties, the new property should be ready within three years of the asset’s sale. However, in case you sell your asset and only use a portion of the gains to buy a property, you can claim exemption only on the amount you use for property purchase. The rest of the amount will be taxable as per the long-term capital gains taxation rule.
Capital Gains Deposit Account Scheme: As a bifurcation to Section 54 and 54F, if you do not get a chance to invest in a profitable property immediately and still want to save your long-term gains from being taxed, you can invest your capital gains in CGDAS by approaching any public sector bank. The timeframe for the purchase or construction of the property remains unchanged in this case as well. But you can utilise this account momentarily so that you save your gains from being taxed and have more time to finalise a property for reinvestment.
The writer is CEO, BankBazaar.com